LivaNova PLC (LIVN) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to LivaNova PLC third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Karen King. Please go ahead.

Thank you and welcome to our conference call and webcast discussing LivaNova's financial results for the third quarter of 2016. My name is Karen King, and I'm the Vice President of Investor Relations and Communications for LivaNova. Joining me today are Andre-Michel Ballester, our Chief Executive Officer, and Vivid Sehgal, our Chief Financial Officer.

This morning's press release and conference call include forward-looking statements. Forward-looking statements may be identified by the use of forward-looking terminology, including but not limited to may, believe, will expect, anticipate, estimate, plan, intend, and forecast or other similar words.

Statements are based on information presently available to us and assumptions that we believe to be reasonable. Investors are cautioned that all such statements involve risks and uncertainties.

Our actual results, performance, or achievements may differ materially from those expressed or implied by these forward-looking statements, which are not guarantees of future performance, and involve known and unknown risks and uncertainties and other factors that are in some cases beyond the Company's control. For a detailed discussion of the factors that may cause our actual results to differ, please refer to our most recent filings with the SEC including our 10-K dated March 4, and other regulatory filings.

Included in the press release today are selected non-GAAP operating results. In this press release, Management has disclosed financial measurements that present financial information not necessarily in accordance with generally accepted accounting principles, or GAAP. Company Management uses these measurements and aides in monitoring the Company's ongoing financial performance from quarter to quarter and year to year on a regular basis for benchmarking against other medical technology companies.

Non-GAAP financial measures used by the Company may be calculated differently from, and therefore may not be comparable to, similarly entitled measures used by other companies. These non-GAAP financial measures should be considered along with, but not as alternatives to, the operating performance measures as prescribed per GAAP.

To enhance the call, we have posted a presentation to our website that summarizes the points of today's call. This presentation is complementary to the other call materials, and should be used as an enhanced communication tool. You can find the presentation in the investor relations section of our website under the events and presentations tab at www.LivaNova.com.

With that, I will now turn the call over to Andre-Michel.

Welcome to our third-quarter 2016 conference call. I want to start this quarter by discussing our recent announcement regarding the transition to a new CEO, then moving to sales performance and future financial goals as I know these are all topics that are top of mind for everyone.

A few hours ago we issued a press release announcing the appointment to the CEO role of Damien McDonald, our current Chief Operating Officer. I will work with Damien over the next few months as he assumes the full responsibilities of CEO effective January 1, and then will continue to support him and the Company into 2017.

It is the right time for me and for the Company to transition, and I'm looking forward to actively supporting Damien and the rest of the organization throughout the process. Damien has a stellar background, joining LivaNova most recently from Danaher. He's fully engaged and ready to lead this Company and achieve LivaNova mission of delivering health innovation that matters.

We just celebrated the first year anniversary of LivaNova on October 19. It's been an extraordinary year on multiple levels. We have successfully merged two great companies into one larger, stronger, and more versatile medical technology leader.

In a short time span we announced five new innovative products across three business franchises and around the globe. We initiated new clinical trials and announced positive outcomes in multiple clinical trials. We brought in new talent and implemented a new organizational structure to enable focus and improve efficiency.

We expanded the Board of Directors, bringing new perspectives and expertise as we reached out to various stakeholders to continuously improve our communication and transparency. I'm proud of the last year and especially of the dedicated and hard-working employees at LivaNova that made us the Company we are today. We have stated that 2016 has been focused on creating the platform for future growth, and I believe we have achieved this.

While overall the business continues to grow with evolving market conditions and challenges in some product lines, we are now forecasting lower sales growth for the rest of the year. We also be will be reassessing our long-term goals in light of the disappointing sales performance we are experiencing in the second half of the year.

However, we remain committed to expense control and operating leverage. We have already restructured less profitable businesses and we are accelerating our efforts to reprioritize investments to our growth drivers.

Before I walk you through a discussion of sales performance, I want to bring your attention to our 3T Heater-Cooler devices. I'll remind you of some of the comments we have provided historically and bring you up to speed on recent activities.

On January 5, 2016, we issued a press release when we received a warning letter from the US Food and Drug Administration, or FDA, on our Munich, Germany, and Arvada, Colorado, facilities which restricted us from importing our 3T Heater-Cooler devices into the US. We still have the ability to service existing customers, which we have been doing through medical necessity protocol. During our second-quarter earnings call we shared with you that softness in our 3T Heater-Cooler device was offsetting strength in INSPIRE, our newest oxygenator, and negatively impacted our cardiopulmonary business.

Then a few weeks ago on October 13, the CDC or Centers for Disease Control and Prevention, released a publication in the morbidity and mortality weekly report and the FDA subsequently released a safety communication concerning issues raised in the report. As a result, we issued a field safety notice -- notification, and correctively and voluntarily contacted our 3T Heater-Cooler customers in the US to inform them of the new information and to help facilitate implementation of the agency recommendations [while in those] publications.

While we're working with regulators to develop a long-term solution that addresses their concerns, we are doing everything we can in the interim to assist our customers. Heater-Cooler devices are critical to regulating the temperature of patients' blood during cardiac surgery procedures, and we have a significant market share position in the US, which means that our Heater-Cooler devices are used in the majority of cardiac surgeries.

Generally, there are no reasonable alternatives to the user of Heater-Cooler devices during cardiac surgery. Without these devices, hospitals would be unable to perform many of the hundreds of thousands of heart surgeries needed by patients each year. We are working with regulators, clinicians, and all relevant parties to resolve this important industry-wide issue.

I'm now going to move to detailed discussion of our sales performance for the third quarter, and then Vivid will discuss our current perspective on our full-year guidance. I will then wrap up with closing comments, leaving ample time for Q&A.

Heading now to our net sales results for the quarter. As a reminder in our press release we provide a table that shows both reported net sales growth and constant currency growth so that you can see the impact of foreign currency fluctuation. For discussion purposes we're going to focus on our comments on net sales results with constant currency growth.

Net sales were up 2.4% compared to the third quarter of 2015. If we now look at each business franchise, first, cost surgery decreased 0.5% for the quarter. While cardiopulmonary was relatively flat, softness in heart valves created a decline in the overall franchise.

[Sales of cardiopulmonary] products were $115 million during the quarter, relatively flat compared to third quarter of 2015. Oxygenators continued to perform well during the quarter. INSPIRE, our newest device, continued to attract strong demand especially in our emerging markets in Japan and Australia.

(Inaudible) the positive contribution from oxygenators was offset by a decline in the heart monitor machine segment. This was primarily due to continued softness in our 3T Heater-Cooler device, which is more recently starting to have a global impact. We have also experienced some delays in hospital purchases for heartlung monitor machines in Europe.

[Sales from heart valves] were $34 million in the quarter, a decrease of 2.4%, which was a significant disappointment. We are pleased with the results of our new sutureless valve first of all in the US, which is driving the strong double-digit growth in our heart valve franchise in the region.

Also, the decline from our base business of traditional tissue and mechanical valves globally was significant. We still anticipate that in the near future this decline will slow down and ultimately stabilize and that the contribution from Perceval will more than offset the decline.

CRM sales were $57 million during the quarter, an increase of 3.6% compared to the third quarter of 2015. On the high-voltage side of the market we recently announced PLATINIUM in the US and are seeing good initial interest. In Europe, PLATINIUM continues to gain share, which has resulted in strong growth in the mid single digit range.

Over the past couple of quarters, PLATINIUM had showed double digit growth, and while ICDs continue to grow at this rate, growth in our CRT-D products have slowed down due to rapid adoption of the IS4 standard. While our competitors are already aggressively pushing the IS4 concept, we now expect the EU approval for our IS4 device in the first half of 2017, significantly later than initially anticipated. As a result, we believe we'll experience softness in CRT-D sales until we receive approval.

At the low-voltage side of the market, pacemakers grew in the third quarter in the mid single digit [tranche] driven by growth in KORA 250 in Japan. We expect to see continued growth for the remainder of the rear as the result of both KORA 250 and an expansion of our low-voltage lead portfolio.

Let's now turn to neuromodulation. Neuromodulation had another strong quarter. Sales were at $90 million, an increase of 6.8% versus the third quarter of 2015, with growth in all three regions despite a challenging year-over-year comparison.

In the US in the third quarter, we reached our one year anniversary from the launch of Aspire SR. As a result, while we continue to see strong volume demand for the device, the initial pricing benefit that we saw in the third quarter last year is providing a significantly smaller contribution to growth in the quarter. This impact will be even more relevant in the fourth quarter.

However, we've continued to see steady device replacement from existing patients, and new patient growth continues to be strong. New patient growth is one of our key metrics in measuring progress for VNS Therapy as it continues to attract new patients. We anticipate in our initial guidance a softer growth for neuromodulation in the second half of the year and we remain confident that the positive momentum we've seen on average in 2016 will continue in the next few years, fueled by new patient growth, disciplined pricing, and new product launches.

Before I turn the call over to Vivid, I wanted to make a final comment regarding our new ventures activities. As a reminder, we have investments in multiple areas, primarily in sleep apnea, mitral valve, and heart failure. We will occasionally provide commentary as these early stage development programs provide public data or reach certain milestones. We have recently made the decision to continue as a minority financial investor in Respicardia, a company focused on Central Sleep Apnea, versus becoming a strategic acquirer.

This is strictly a portfolio decision. Respicardia announced positive results from their pivotal trial, and we remain fully supportive and excited about their technology and management team. In addition, we are very encouraged by the early clinical results presented by the per continuous module companies that we have invested in, both in London last month and at TCT over the last few days. We remain very excited about the space and the ability of our investment portfolio to provide leading technology to address the significant clinical unmet need.

I will now turn the call over to Vivid for an overview of our financial results. Vivid?

Thank you, Andre-Michel.

Adjusted gross margin as a percentage of net sales in the quarter was 64.5%, up 70 basis points from the third quarter of 2015 due to a positive mix impact from [set] with high margin products, a favorable country mix, and manufacturing synergies. For full year we still expect gross margin to be in the 64% to 65% range.

Adjusted R&D expense in the third quarter was $31 million. R&D as a percentage of net sales was 11% compared to 13% for the third quarter of 2015. For the full year adjusted R&D is now expected to be in the 10% to 11% range. We remain committed to internal R&D. The lower range is in line with our focused approach of reprioritizing spending and progress we have made with our merger and restructuring efforts.

Adjusted SG&A expense for the third quarter was $104 million. SG&A as a percentage of net sales was 35%, down over 200 basis points from the third quarter of 2015, largely driven by expected merger synergies, as well as disciplined cost control. For the full year we still expect adjusted SG&A to be in the mid 30% range.

Adjusted operating income was $55 million compared to $40 million in the third quarter of last year, an improvement of 38%, which demonstrates our commitment to leveraging the income statement. Gross profit was up year over year, while operating expenses were substantially down. Adjusted operating margin was 19%, a major improvement compared to 14% in the third quarter of last year.

Our adjusted effective tax rate in the quarter was 25.5%, an improvement from the 26% in second quarter. As a result of our ongoing tax efforts we expect continued improvement for the remainder of the year to achieve our full-year effective tax rate projection in the range of 24% to 26%. Finally, adjusted diluted EPS for the third quarter of 2016 was $0.78.

Turning now to cash flow. Our cash flow from operations for the nine months ended September 30, was $49 million. Cash flow from operations excluding payments for one-time integration and restructuring costs was $86 million. Capital spending for the first nine months of 2016 was $27 million, in line with the same period of 2015.

Our cash balance at September 30, 2016, was $64 million, flat with our cash balance at June 30, and down from $113 million at December 31, 2015, reflecting planned debt reduction, the elimination of factoring arrangements, costs associated with ongoing restructuring activity, shared repurchases, and the funding of our equity investments. Before I move to guidance, I wanted to briefly discuss our share repurchase program and our merger-related synergies.

In the second quarter, we announced that our Board of Directors approved a repurchase program of up to $30 million in 2016 and up to $150 million to the end of 2018. To date, we have repurchased approximately $22 million. Regarding merger-related synergies, we stated that our goal this year was $19 million. To date have been able to capture over three quarters of that. We are on track to reach our annual commitment and well-positioned to achieve our internal synergy targets for 2017.

Moving to guidance, on the topline we now anticipate the constant currency sales growth will be approximately 1% to 2% for the full year of 2016. I want to assure you that we still have strong confidence in our new products such as Perceval, AspireSR, and INSPIRE, and believe they will continue to perform well in the upcoming quarter.

However, as I have discussed, there are a couple of unexpected items that will overshadow their positive contributions in the second half of this year. First, after the CDC publication and the FDA safety communication, we've implemented a loaner program for our customers in the US that may limit our ability to sell 3T Heater-Cooler devices in the marketplace We're also seeing unusual softness in the market for [heartlung] machines outside of the US.

Second, while we saw grow in the third quarter in our CRM business and expect to see continued growth through the rest of the year, the pace will be significantly slower than we anticipated due mostly to the delayed approval of the IS4 product in Europe. With the statements I've made about margins and operating expenses, we believe we can still meet our adjusted earnings per share guidance for the full year with an narrowing of the range to 2.95 to 3.05.

We continue to progress with our synergy and restructuring activities and remain confident that we can continue to hold our expenses relatively flat and expect our tax rate to continue to improve due to our tax planning efforts. With that I will turn the call back over to Andre-Michel for some final comments.

Thank you.

The third quarter had both positive and negative attributes. While we didn't meet our internal expectations of the topline due to certain unforeseen market conditions, the combination of merger-related synergies, restructuring efforts, disciplined cost controls, and focused R&D, resulted in solid margins and earnings. (Inaudible) to reset sales guidance based on our third-quarter performance and the current and expected trends we are seeing, we believe that it is prudent to assure the right expectations are set for the remainder of this year.

The Management Team is committed to building this business, investing behind our growth drivers, and wisely leveraging our strong balance sheet. We remain committed to driving long-term shareholder value.

With that, Operator, we are ready for questions.

(Operator Instructions)

Our first question comes from the line of Brooks West from Piper Jaffray.

Hi, can you hear me?

Yes, we can. Good morning.

Thanks for taking the questions. Good morning. So I guess the first question is just around the warning letter, and I know tough to predict, but is there any way to assign a timeframe to resolution on that issue?

As you said, it's not easy to predict the outcome of the [certain issues], but what I can tell you is we are obviously working very, very hard with the FDA and actually with all the regulatory authorities around the world. We're working also very hard with the -- with our customers, physicians, and priorities of course around patient safety, around customer satisfaction, and obviously ultimately the Company's reputation itself.

It is -- the development with the CDC publication followed by the communication by the FDA has I would say increased the pressure on the market to find a solution, and we're working very aggressively and working very closely with the FDA and with our customers to keep them as well informed as we can and taking the appropriate steps necessary. Our sales force is working 24 hours per day and seven days a week to make sure that they are in front of the customers, and trying to work with them.

What's really important for us is that we have to work with the FDA in particular, but with also other regulatory agencies around the world to advance the permanent solution to this industry-wide issue. We have a very, very good ongoing dialogue with the FDA, but at this stage, Brooks, I would say it's probably too early for me to determine a date at which we will start implementing the plan of action.

Again, we're working very, very hard. It's on top of our prior as I'm sure you can imagine, but probably too early for us to give a timeline on this.

Okay. Thanks for that. And then I guess as a follow-up with that in mind, I'm going to ask you another question that's going to be hard to answer, but I'm hoping you will test my thought process.

As I look into 2017 in particular, and I look at your businesses and the trend lines, and if anything you could maybe argue an incremental headwinds in neuromodulation as you continue to anniversary the Aspire SR launch and associated price, and maybe a little bit more continued pressure on your surgical valve business. Is it wrong to think about the business in this kind of 2% growth range, maybe a band around that as we look into next year?

Brooks, you're right, it's a tough one to answer. Okay, so, first of all the -- we've been -- basically we've seen things in the recent months, or I would say even in the recent weeks, that we did not necessarily expect. Two issues that really were to us -- hit our performance in the second half of the year.

One is related to the CRM business and the delay in approval in Europe of the IS4 standard for our product. The first time that we see delays of that nature coming from GMED. We could certainly [devolve] that, but it's very, very unusual for them to take such a long time to approve a product that is basically fairly straightforward file. So basically we have more than a six month delay on that, and that will have a relatively positive impact then when we have the approval probably early 2017.

I mean, the other piece that really happened in the last few weeks is the CDC and FDA communication for which today we have let's say not yet been able to as we said before set a timeline and really predict exactly what's going to happen in the next few months.

Now having said all this, okay, I can tell we are still very positive about the new products we've launched. INSPIRE is still getting share in the oxygenated business. Perceval has driven more than 20% growth in [valve] business in the US in the third quarter and it's only the beginning.

With KORA 250 that has regained some steam in -- for us in Japan. We have PLATINIUM that is -- once we get the IS4 standard approved, and the sooner the better, we're hoping to have the same growth in CRT-D that we have seen recently in ICDs.

Last but not least, we believe neuromodulation has a strong new patient growth. And yes, it's true that we might have to anniversary -- to the anniversary of the launch, but what's important for us as we look at new patient growth and we see that as a positive trend moving forward.

I believe that at this stage we are not going to basically gave 2017 guidance. We will give it when we give our call in February and maybe Vivid wants to add some color on this.

Brooks, I just want to emphasize the fact that I think we also are really focusing heavily on our cost base and making sure we are reinvesting. I think what you see from us right now is that light of this we certainly have focused on topline sales growth, we have reprioritized well, and we're making every effort to keep going with that process we have.

So I think at the moment the best thing for what we're doing is we are reassessing our year-end position which we are doing now. But at the same time we're very, very close in terms of redoubling our exit efforts and trying to put additional resources behind the growth drivers. But what's really important is that, as Andre-Michel stated, that we will provide full transparency over our 2017 expectations when we do give our quarter full call in February of next year.

Okay. That's helpful. Thanks guys, I appreciate the questions.

(Operator Instructions)

Our next question comes from the line of Scott Bardo, from Berenberg.

Thank you very much for taking my questions. Quite disappointing sales update in my opinion certainly considering the weak comparison that you had last year in CRM, so I'd like to just talk a little bit about this IS4 product because it's the first I've actually heard of this -- the significance of this product to an accelerated back half performance.

And so I wonder if you can share a little bit about what your expectations are for that product or how not having that approval is hampering growth for that business? And expanding upon that point, given the that you are in a new product cycle for CRM and the comps are quite weak, can you give us some feeling of where you expect CRM to close for the full year, and is that sort of a sense of the growth that you would expect going forward in this business or are there more products to come to bring this back to life? So that's the question number one please.

Second question relates to the Heater-Cooler issue. It was my understanding that you had already encapsulated around one percentage point of sales impacting your guidance related to this effect being a relatively small product line, and so that wouldn't perhaps explain some of the overriding volatility that you see in the cardiopulmonary business.

So can you give us a broader feel of what the total revenues of this particular franchise is and whether you're going to see anecdotally whether there has been lower cardiopulmonary procedures going on or some fear in the market as a result of this issue? So the first two, and I have a follow-up please.

First of all, nobody is going to disagree with you that we are disappointed with our Q3 sales and I think the -- I was pretty clear on the call, and we're putting a lot of time and energy as a team to face the issue. We believe we have great products in our portfolio, we have great products that we have launched in the last two quarters, and we believe that CRM in particular the PLATINIUM platform is a great platform that has shown double digit growth in Europe in the high-voltage segment over the last two quarters.

And we have seen a slowdown in this growth and we're not expecting this slowdown simply because the IS4 which is a pretty -- now a common standard product for CRT-D, we thought it was going to be uneventful and therefore just a normal evolution of the product family. And we had started to actually present the product to customers with the expectation that the product will be approved in June of this year.

This is a big deal because as you know in this market product lifecycle is very short, and the market has become even more dynamic from that standpoint in having really 12 to 18 months life cycle for products. And IS4 was our kind of improved feature on top of the PLATINIUM platform.

It was a very big disappointment for us to see that we did not get approval in June, then approval was scheduled in July, August, and so on and so forth. And now we are realizing that because of mostly the unexpected and difficult to understand way our (inaudible) body GMED is looking at this product, we can't -- we're not comfortable that we will get IS4 before early next year.

In itself it was not necessarily something that was going to accelerate growth, but what happens is that not having it has really strongly decelerated growth of this CRT-D product line to a point where we're not going to be able to achieve our targets for CRM for this year and particularly in the second half of the year.

In terms of the Heater-Cooler, the sales guidance was -- when we put it together, we set a maximum 1% that was associated with the 3T Heater-Cooler [in the West].

First of all, it was for us a maximum, and at that time given where we were we did not think we would ever go to the maximum of the 1% that we mentioned. And second, we did not expect the issue to become a global issue as it has become now. So the impact on the equipment sale of the cardiopulmonary business has become in the second half of the year more significant that we initially anticipated. You said you had a follow-up question?

Yes, thank you. So just to understand with CRM then failing to grow and despite weak comps in new product cycle, I mean is this now becoming accelerated within the Company to consider your strategic options for this business or is the hope and plan to continue to launch new products and hope that there is enough to drive a bit of growth into this business? So that's follow-up one.

Second follow-up is just related to the midterm plan that clearly the Company issued early last year. That plan did encapsulate 5% to 6% growth if I understand and you previously highlighted delivering some growth was important and required to deliver the sort of operational leverage that you would expect.

So what I'm trying to understand is, is there capacity ability within the organization to accelerate cost-cutting or to drive continued margin expansion even if the top line is slightly weaker than you anticipate over the next few years? Thank you.

Let me take first the CRM question and then I will let Vivid talk about the P&L leverage. On the CRM the -- as I said before, once we get the approval of the IS4, and we have a number of other smaller approvals that we are expecting I mentioned during my prepared remarks, some leads on a broad basis in Japan but also in Europe. So we have a product portfolio that is pretty rich and will come in the next few quarters and we believe that this is a business where we have technology and we have great platform with PLATINIUM in high-voltage and KORA in low-voltage.

Now we have no current plans to sell the business or spin it off. We're continuing to dedicate [ordinary] resources to the business and we are seeing progress in Japan, we're seeing progress in Europe with high-voltage.

Unfortunately we have this delay in the launch of our new products. With the market conditions as they are today, they are certainly a very difficult thing to absorb. We're still seeing the market with tough pricing conditions and this has not improved over the last few quarters.

We're focusing our efforts on Europe and Japan and some selected emerging countries. We believe that this business is a good business for us to have in our portfolio right now with great technology and great technology synergies with -- in particular the neuromodulation business. I'll let Vivid answer the leverage question. Vivid?

I think it's important to understand that as we finish this year while we appreciate the sales line has been soft. I would draw everyone's attention to the fact that each line in the income statement has actually been hitting where we [integrating] guidance at this point, i.e our operating margins on an adjusted basis over 19%, which is five points higher than last year.

So what I think that's about is really about two things. I think were exiting the year from an expense profile and operating leveraging perspective in a pretty healthy state at this point. I'd also sort of talk about the longer-term. What's really important and what we're focusing on right now is that -- and we said this from day one -- is that we will align our expense base to the sales profile of this Company. And that's exactly what we have just done in the Q3 and that's what we're going to do in Q4.

And that's why as Andre-Michel said we're going to take a little time to understand the trends of this business, but to the answer, can we realign or continue with the expense cutting? I wouldn't look at it cutting. We've never gone out and cut expenses.

What we've done throughout this whole time is to commit ourselves to delivering our synergy targets. We're absolutely on track with that. We've structured the business in a very, very appropriate way. We will continue to align our expense base to delivering topline sales growth and we're going to carry on reprioritizing. So the answer to your question is in effect yes, we do have some capacity in our Company because that's how we are exiting the year and we have plenty of flexibility to do that for now.

Okay. Thanks. I'll jump in the queue again.

(Operator Instructions)

Our next question comes from the line of Michele Baldelli from Exane BNP.

Hello. Good afternoon to everybody. Just two questions. Let's see. On one side you have the CRM sales of the last quarter was particularly weaker. If you can elaborate the reasons behind given that you spoke about the European situation but just to understand.

On the other side just to take a flavor about the biological balance, can you update about the performance in particular of the biological [balance] alone and can you elaborate and give some figure about the new patients acquired through (inaudible) and how much of your sales is just a shift from the neurobiological (inaudible) so there is not an increase of the number of patients undergoing surgery with your products? Thank you.

Michele, the share on business actually showed a 3.6% growth in the third quarter and we said in our prepared remarks that we expected this to be a trend that we could continue for Q4. We had actually a performance. If you look at the performance by region, it was driven by a strong performance in the rest of the world and we make no secret that part of this performance is Japan and the regain of share in KORA 250.

We had a let's say lower than previous quarter performance in Europe where as we said we have continue to make good progress with ICDs, but we lost momentum on the CRT-D because we're expecting the IS4 to be approved by then and therefore to regain some momentum in the ICD with a new product or a new feature on the product. We didn't have it.

We believe that when we will have it we will be able to regain some momentum on the CRT-D side. The US was impacted by the late launch of PLATINIUM in the US, which we thought we would benefit from a full quarter in the US, but actually only benefited from a few days of sale at the end of the quarter, so that was kind of a disappointment for us but I would say the US is not a priority for the Company right now.

If you look at really Europe, we believe that we are in line with our previous quarter performance if you except the impact of the IS4 delayed launch that again will catch up in the quarters when the IS4 is launched. In terms of the [Perceval flow] valve, the -- we've said before that we don't see cannibalization of our valves by Perceval. Actually, we have numerous examples of -- particularly in the US now where we launched the product -- of very large hospitals that were barely using mitral flow or crowns now and now are using a lot of Perceval and have actually started using Perceval for all their patients.

It is -- we believe we are gaining share -- in particularly in the US we are gaining share against other valve manufacturers and we are very proud of the 21% growth that we are showing in the quarter and we believe it's the beginning of a very positive trend for our valve business in the US.

So confidence in our ability to continue to drive Perceval with new patients, with new customers, with very large academic centers that were not using our products portfolio before and now have started to use Perceval, so certainly a positive highlight of the quarter for us and a positive highlight of the second half of the year is the trend we see with Perceval in the US and with our valve business in general in the US.

Okay. And just to understand the biological valves altogether at the group level are now increasing in terms of sales in the first nine months or decreasing?

We don't split the valve business by type of valve, but it's clear that we have seen in the past quarters -- we have seen an erosion of our traditional mechanical valves and tissue valves business. On the tissue side, it's obviously -- it's more than compensated by the growth in Perceval, but we have the mechanical valves that are being eroded in a number of countries now.

To be honest with you, there is the market conditions in mechanical valves, but we believe that we have some execution issues that we have been facing and we've kind of made some tough decisions in a couple of regions. The valve business is not a business that we act very, very quickly so it will take time for us to regain momentum. But again if you look at the tissue side of the business, which is the fastest growing business that we have in the valve segment thanks to Perceval, we're definitely happy about the performance overall of this segment.

Okay. Thank you. And lastly, do you foresee any weakness for the [heart valve] machines in the US or in other regions because of these ongoing investigation in [pharma]? I mean the one on the Heater-Cooler just because probably compared those will act let's say aggressively on this kind of news?

We definitely see [competitors] acting very aggressively on the Heater-Cooler. Just as a reminder, we believe it's an industry-wide issue so we'll leave everybody to take his own decisions on that. But the -- on the heart valve machine we have the best product in the market. So far we haven't seen anybody with a product that was close to the S5.

What we have seen in Europe in the recent quarter and we see again in Q4 is a soft market, so really hospitals not ordering a replacement heart valve machine at the same rate that they used to order them in the last few years. We don't really know if it's related to the Heater-Cooler issue and in the US we have not seen necessarily a relationship between the two at this stage.

What we're seeing in the equipment business is really two different dynamics One is related to the Heater-Cooler specifically as we have loaners and we limit -- we have limited sales capabilities, and the second one is we've seen kind of a softness in the order book in Europe in particular for the heart valves -- for the main equipment.

Thank you very much.

Our next question comes from the line of Scott Bardo from Berenberg.

Thanks for taking the follow-up questions. Firstly, it seems that most of the problems here from the topline perspective have come from legacy Sorin. And of course with the divisional structural change with some of the previous heads now leading the organization and, Andre-Michele, the news today that you're stepping aside for Damien, I wonder if you could share some thoughts. Do you think there is enough experience, talent within the new organization surrounding legacy Sorin such that improvement can improve for both that business and the group? So that's first question.

Second question just relates to new ventures. I just wanted to understand because we started off I think when the Company was formed discussing three new venture opportunities: heart failure, sleep apnea, and also mitral. It sounds to me that the only real active program now for the group is now in mitral. If you could confirm that and also a little bit of detail as to what has led to that position and also what that means from your minority losses that you record for the group both this year and next?

On the first question, I really think that the issues we have in cardiac surgery and direct [consumer] CRM are issues that the management team is absolutely able to face. And with the leadership of Damien with my full support, I believe the Company will be able to face these challenges and turn them around.

Because as we have changed the organization from a business [center] organization to a regional organization, I think we had a great talent pool in the organization regionally. And I'm here today in Houston and I'm talking to our US leadership team and they're offering a tremendous amount of knowledge of the US market, a tremendous amount of energy and salesmanship, a tremendous amount of leadership and also a great track record.

So I believe that this new organization we put together even if some of the historic leaders of the Company are now kind of taking a different path, we have very, very strong roots in this business in the franchises and we will keep these roots and this knowledge. And we have new talent across the organization.

I mentioned the US, but I can also talk about emerging markets. We're looking for a new leader in Japan, we have a very strong team in Europe that's a mix of the let's say two legacy companies. So I'm extremely confident that we have the human capital and the talent and the knowledge to face some of the issues we have and to take advantage of the opportunities we have because certainly I'm very proud of the a lot of things the Company has done in the last few years and particularly launching new products.

We certainly have great opportunities with Aspire, with AspireSR. We have great opportunities with Perceval, and we believe that, again, we have the team to face that opportunity.

So on new venture I would say I would not necessarily conclude as you said that the only thing we're focusing on is mitral valve. I think you could conclude that probably at this stage we are extremely excited and focused on mitral valve because in London -- in the London valve meeting a few weeks ago, and now our [TCT] over the last few days, there were more details that were communicating -- communicated around the initial clinical experience of both HighLife and Caisson in which we have minority interest. And I must say that these clinical results are extremely encouraging. And I'm saying it but more importantly the physicians who have been attending these standing only meetings with hundreds of physicians in the room, the feedback we get from them is that they are very excited about the technology.

On one side I would say this is probably very exciting right now, but we have other things that are exciting. We've certainly not let's say -- we're not turning our head away from sleep apnea. Respicardia is now becoming a financial investment for us. We are a confident in the technology and the management team. We have opportunities in obstructive sleep apnea that are still alive and very exciting.

On the heart failure side, I wouldn't necessarily write it off at this stage. There were some disappointments because of the clinical trials by valve control by other companies, but we have some very good results ourselves.

We've made very good progress recently in building our clinical strategy for these patients, and we're working actually with the FDA as we speak to establish a critical strategy that will provide a path to the US in a reasonable period of time. We hope we can provide more clarity on that as our -- on our future plans in the coming months. This is the business side of it. I think Vivid could probably help add some comments on the capital allocation strategy as well. Vivid?

Yes, and I think, Scott, that's the important part. I think it's an important discussion right now in terms of it. I really see that the balance sheet strength of this Company is not diminished in any way. If you actually look at our adjusted operating income we had a 38% improvement in that. We've held our net debt relatively stable despite share repurchasing and some investments within our [market interest]. So the balance strength that we have at this Company, and we've always said, will give us a full range of options on capital allocation strategy.

And I think from our perspective the portfolio of choice was exactly the right choice in terms of aligning ourselves for what we consider to be an important platform for 2017 where of course we will look at our capital allocation. We're looking at it right now, and made some very important decisions for the Company.

I would like to remind that the balance sheet strength of this Company is one of the good and best opportunities we have and we certainly do not intend to sit and just let that pass us by. It's something we will consider very strongly.

Okay. Thank you. I mean I think previously capital markets that you highlighted that you could see some revenue contribution from these assets and these (inaudible) in 2017 I think as in previous slides. So can you give us a feeling of when you, all going well, expect some contribution from these mitral asset and presumably some of the steps you've taken with Respicardia today signal a favoring toward supplying capital towards some of those assets? So perhaps if you can share bit more on that please?

It's so early for us because again these are investment companies that don't belong to us. We have the right to acquire them. That has been agreed when we first invested in these companies, so we will come -- as we said, 2016 for us was a critical year. [Think of] mitral, because that was the year when these companies would start their clinical trials.

I think we can check the box in terms of early clinical trials, but it's very early so both companies have had five patients each and they will continue to recruit patients in the next few months. Now having said that, mitral is a large market. We've put out in -- recently our estimate of the size of the market, more than 50,000 patients that could be implanted with the device of that sort in around 10 years from now with really great expectation from our side.

A little early for us to discuss market introduction and so forth of companies that we don't own, but I can guarantee you that this is on top of our priority list and something that Damien and I have been already discussing for some time and we will continue to focus on moving forward.

And we have to close the call here. I would like to tell you one thing, that I'm extremely excited about what we've done as a Company in the last 12 months and putting these two great companies together to build a larger and stronger Company. I'm extremely excited to have Damien as a leader for this Company moving forward.

We're entering into a new phase. Vivid said multiple times that 2016 was for us the year of building the base. I think we have achieved a lot of the objectives that we had set to ourselves in 2016. It's a good time to move to the next level and I think Damien is going to be a fantastic leader for this organization and will drive the organization moving forward. Karen?

Thank you, everybody. We appreciate you being on the call, and everybody have a great day. Goodbye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.